Backwardation
Backwardation is the shape of a futures curve in which later delivery months trade below the nearer ones. It appears when holding the underlying now is worth more than deferring it, because of scarcity, a convenience yield or an income such as dividends that exceeds the financing cost.
Senzoukria · Glossary · Updated September 2026
Definition
The CFTC glossary describes backwardation as a market situation in which futures prices are progressively lower in the distant delivery months. It is the mirror image of contango, and a curve can switch between the two, or be in backwardation at the front and contango further out.
Why a curve inverts
For physical commodities, backwardation usually signals tight near-term supply: users pay more for barrels or bushels available now than for delivery later. The benefit of holding the physical good, called the convenience yield, outweighs storage and financing. For equity index futures, deferred contracts trade below the front when the dividend yield exceeds the financing rate, since holding the stocks earns more than it costs.
Worked example
Hypothetical crude oil curve: first month 70.00, second month 69.40, third month 68.80. Each step is -0.60 dollars per barrel, that is 60 ticks of 0.01 or $600 per 1,000-barrel contract. A calendar spread quoted first minus second is +0.60.
What it means for a trader
A long position rolled forward in backwardation sells the expiring contract higher than it buys the next one. If spot stays unchanged, the new contract drifts up toward it as it ages; that drift is the positive side of roll yield. It is not free money: it only materialises if the curve and the spot price behave as assumed. For intraday charts, levels shift down by the spread when the chart moves to the next contract.
In Senzoukria
The application does not plot a curve of futures months. On its GEX volatility page the equivalent inversion of the implied volatility curve across option expiries is labelled 'Inverted — the front expiry is paid above the back'. That describes option pricing and must not be read as a statement about the futures curve.
Common mistakes
- Assuming backwardation guarantees gains for long holders.
- Reading it as a directional forecast for the front month.
- Mixing up the futures price curve with the implied volatility curve.
Related
In the same section
Sources
- CFTC glossary (2026-09-25)
This page in other languages
Frequently asked questions
- Is backwardation a sign of a shortage?
- In physical commodities it often reflects tight near-term supply, but it is a price shape, not a measurement of inventories. For financial futures it usually reflects income on the underlying, such as dividends, exceeding financing costs.
- Can a curve be in contango and backwardation at the same time?
- Yes. The front months can be inverted while later months slope upward, or the reverse. Describing the curve therefore means naming which part of it you are looking at.